Michael Burry Does Not Think Another Financial Crisis Is Looming (?)

Michael Burry Does Not Think Another Financial Crisis Is Looming (?) by LST

New York Magazine‘s recent piece about Michael Burry, is titled Michael Burry, Real-Life Market Genius From The Big Short, Thinks Another Financial Crisis Is Looming. The problem is that the title’s main claim – that Burry believes another financial crisis is looming – appears to be nothing more than a dubious inference made by the author (call me cynical, but…perhaps to attract eyeballs?). Burry’s actual on-the-record statements do not support that claim… at least to me.

The following statements from Michael Burry, Real-Life Market Genius From The Big Short, Thinks Another Financial Crisis Is Looming would superficially appear to support the “Burry thinks another financial crisis is looming” thesis (in red are my opinions as to why they do not):

The little guy will pay for it — the small investor, the borrower. Which is why the little guy needs to be warned to be more diligent and to be more suspicious of society’s sanctioned suits offering free money – Michael Burry is simply saying that no major C-Level executive who contributed to/caused the Credit Crisis pre-2008, specifically fraud-related offenses, were punished to this very day, while plenty of “little guys” did. He’s saying that the same American “Justice” system that have left these criminals untouchable remains intact, and that the “little guy” should watch after his/herself. HE IS NOT PROGNOSTICATING A FINANCIAL CRISIS.

We are building up terrific stresses in the system, and any fault lines there will certainly harm the outlook – Burry is saying the system is fragile to any shocks due to low interest rates and/or the Federal Reserve’s monetary easing policies. He’s making a descriptive, not predictive point (i.e. “the system is fragile”, not “the system will break”)

What makes you most nervous about the future? Debt. The idea that growth will remedy our debts is so addictive for politicians, but the citizens end up paying the price. The public sector has really stepped up as a consumer of debt. The Federal Reserve’s balance sheet is leveraged 77:1. Like I said, the absurdity, it just befuddles me – Burry is simply answering the question with what he believes is the biggest ‘Risk Factor’ Americans faces. Nowhere does he elaborate on how serious, or how imminent.

The last line of the movie, printed on a placard, is “Michael Burry is focusing all of his trading on one commodity: Water.” It sounds very ominous – Author This leading question by the author only serves to betray the author’s bias that Burry’s focus on water investing is sufficient proof that Burry is bearish. The inference the author appears to be making is that Burry must believe that the US faces some kind of Mad Max dystopian future, evidenced by his focus on water investing. I believe this is faulty reasoning. I personally can think of one non-macro-bearish future path of the world that renders water more valuable.

While the above statements may provide sufficient bases to the masses (or the author) that Burry believes in a looming financial crisis, note that the term “financial crisis” in practicioner’s lingo, is not merely a recession – but a case where the banking/monetary/securities systems themselves are at risk of failure. i.e., situations where macroeconomic shock/weakness is induced by endogenous/systemic factors.

I am not claiming to know with certainty that Burry does not believe another financial crisis is looming… I am simply showing how the New York Magazine article’s title is not supported by Burry’s statements. It’s possible that Burry believes another financial crisis is looming… but my personal guess is he would not share such claims publicly.

Ability to weather draw-downs– Scion demonstrated the ability to weather 10-30% drawdowns (due to putting on concentrated asymmetric positions). It also put on positions with such risk but commensurate return potential… these are behaviors asset gathering types simply will not and cannot achieve.

Position sizing – Scion demonstrated ability to “go for the jugular” with large position sizing, when it mattered. It’s not clear what value-added most so-called “long/short”, “value-oriented”, “special situation”, and/or “event driven” provide beyond synthetic beta (minus 2 and 20).

De facto flexibility in net exposure – 20%+ position short sub-prime, although quite different from shorting equities (I get it)… Most hedge funds today seem closet long onlys that somehow justify 2/20 compensation (they must thank God there exist such gullible “investors”)

Atypical backgrounds – Dr. Burry was a medical student turned resident (he was poor/technically insolvent, as his debts exceeded his liabilities) turned stock message board fanatic, turned highly performing investor. He did not attend Wharton, nor did he do 2 years of banking/consulting, nor did he work at a private equity firm… etc etc etc. Burry was not a member of the financial Brahman caste, yet he handily outperformed them anyway.

Burry is an imperfect man, like you and I, with his fair share of flaws/weaknesses/imperfections. I’ve learned over time not to idolize any human being (particularly if they’re still alive!).

That said, I have found his story personally inspiring and motivating. There is much to be learned by one’s own and others’ failures…as well as successes.